Response to a “Worse-Case” Pension Scenario with an Accurate One in Minnesota

The Minneapolis Star Tribune recently ran two editorials giving a point / counterpoint on the state’s public pension system.

On one side is the Mark Haveman, executive director of the Minnesota Taxpayers Association, challenging the state pension plans’ investment return assumptions and the plans’ overall sustainability. Mr. Haveman writes:

While public pensions lack certainty, there’s no shortage of risk. Risk to public services, when pensions need more government resources. Risk to future taxpayers, as courts have consistently ruled that benefits promised under these plans must be paid. Risk to current public employees, as higher contributions eat into take-home pay even as the long-term sustainability of today’s benefit levels becomes more doubtful.

On the other side are the board chairs of the three statewide systems: Thomas Marshall, Mary Benner, and Martha Lee Zins. Following is their response in its entirety, re-printed with permission from the authors.

Public Pension Investment Returns and Market Volatility

For fiscal year ending June 30, 2011, state and local government retirement systems had a median investment return of 21.6 percent.

That statement is often followed by “but…” as in “but look what’s happened to the markets since then!” 

With a slow economic recovery and ongoing global market volatility, the fact remains that taking a long-term focus is an overarching factor in public pension investment strategies and projections.

What about GASB?

The timing of the Government Accounting Standards Board’s (GASB) review of its accounting standards and modifications to these standards has nothing to do with media headlines.  Every 10 years, GASB takes a deliberative and very public look at its current standards and makes modifications that it believes will improve disclosure and reporting, with much input from experts and the public.

In other words, it’s business as usual.

Another Round of Rauh & Novy-Marx Questionable Projections

Robert Novy-Marx and Joshua Rauh – whose analysis last year contained flawed methods reflecting an inaccurate understanding of public sector finance and operations– released a new paper that makes more dramatic projections about the condition of public retirement systems and their effects on state taxes. The paper, The Revenue Demands of Public Employee Pension Promises, uses underlying assumptions that understate revenues, inflate costs, and ignore other available public policy options. As a result, the paper’s conclusions bear little resemblance to the actual practices of most state and local governments, or their pension plans, and again have limited application for policymakers wishing to address the financial impacts of the Great Recession.

Long-term public pension fund investment returns continue to exceed assumptions

State and local retirement trusts accumulate and pay out assets over decades, and as such, have an extended investment horizon. While the recent rebound in asset values is noteworthy, long-term investment return performance is most critical.